2017 (2) TMI 1498 - AT - Income Tax

Deduction u/s 80IC - profits relating to outsourced process - sale of products got manufactured from others through job work - Manufacturing of SS Flats - assessee was in the business of manufacturing stainless steel flats - gross total income declared by the assessee for the year included profit and gains from its industrial undertaking at Kala Amb,Himachal Pradesh - HELD THAT - After considering the facts of each case, the courts ruled that it is not essential for the assessee to carry out the entire manufacturing activity itself, for the purpose of claiming deduction on the profits earned thereon and even if a part of the activity is outsourced or for that matter even if the whole manufacturing activity is outsourced, but carried on under the supervision and control of the assessee, it would still tantamount to manufacturing being carried out by the assessee itself, making it eligible to claim deduction of profits earned thereon. Entire manufacturing activity of SS flats was under the supervision and control of the assessee itself and took place either in its own premises or was outsourced as per its own specification - it can be said without any hesitation that it was the assessee who was indulging in the manufacturing of SS flats - it is not the case of the Revenue that the assessee was buying SS flats from an outside party and then selling it. Therefore, for the aforesaid reasons, we hold that the assessee undertook the manufacturing of SS flats and was entitled to claim deduction on entire profits earned from the same. Assessee was only required to manufacture SS Flats to be eligible to claim deduction u/s 80IC,which since we have already held so above,the assessee was entitled to claim deduction of entire profits earned on the same u/s 80IC of the Act. For the said reason also we are not in agreement with the contention of the Ld. DR that the profits should be apportioned to different activities involved in manufacturing of a product and deduction u/s 80IC thereafter be restricted to profits on manufacturing carried out by the assessee only While allowing deduction on part of the profits earned by the assessee, the Revenue admits that the assessee is involved in manufacturing activity. Also admittedly the assessee has been allowed deduction of entire profits in earlier years in identical set of facts. DR has not controverted this fact contended by assessee. Therefore also there is no reason to restrict the deduction to the extent of manufacturing activity carried out by the assessee in the impugned year. DR applied the provisions of section 80 IA(10) - For the applicability of section 80IA(10) it has to be demonstrated that there was an arrangement between the two parties which resulted in the inflation of profits in the case of the assessee. In the absence of both the conditions specified under section 80IA(10) we hold that the said provision of has been incorrectly applied by the Ld. CIT(Appeals) to the facts of the case and the addition made by applying the same is therefore grossly incorrect. Manufacturing of SS Flats was carried out by the assessee and thus it was entitled to claim deduction of entire profits earned on the same u/s 80IC

Issues Involved:
1. Disallowance of deduction under section 80IC on profits from outsourced manufacturing processes.
2. Applicability of section 80IA(10) in reducing the deduction claimed under section 80IC.

Issue-wise Detailed Analysis:

1. Disallowance of deduction under section 80IC on profits from outsourced manufacturing processes:

The core issue in the appeal was the disallowance of ?4,26,970/- from the deduction claimed under section 80IC by the assessee. The Assessing Officer (AO) noted that the assessee outsourced part of its manufacturing process to an associate company, Nahan Ferro Alloys & Chemicals Private Limited (NEA), and held that only profits from the manufacturing activity directly undertaken by the assessee were eligible for deduction under section 80IC. The AO computed the disallowed profit by applying a rate of 3.81% to the total job work charges paid to NEA.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the intent of section 80IC was to encourage manufacturing activities in specified areas through direct investment in manufacturing facilities. The CIT(A) referenced CBDT Circular No. 7/2003 and section 80IA(10) to support the view that the deduction should be restricted to profits from activities directly controlled by the assessee.

Upon appeal, the Tribunal examined whether the entire manufacturing activity, including outsourced processes, could be considered for deduction under section 80IC. The Tribunal noted that the assessee carried out most of the manufacturing processes except for the conversion of ingots into flats, which was outsourced due to lack of infrastructure. The Tribunal cited various judicial precedents, including decisions from the Calcutta High Court in Add. CIT Vs. A. Mukherjee & Co. (P) Ltd., Bombay High Court in CIT Vs. Neo Pharma P. Ltd., and others, which established that outsourcing part of the manufacturing process does not disqualify the assessee from claiming deductions if the overall control and risk of the manufacturing process remain with the assessee.

The Tribunal concluded that the assessee was engaged in the manufacturing of stainless steel flats and was eligible for the deduction under section 80IC on the entire profits, including those from outsourced processes. The Tribunal emphasized that the section does not require the manufacturing process to be wholly in-house and that the assessee's activities constituted manufacturing under the supervision and control of the assessee.

2. Applicability of section 80IA(10) in reducing the deduction claimed under section 80IC:

The CIT(A) applied section 80IA(10), which allows the AO to re-compute profits in transactions between related parties to prevent inflation of profits. The CIT(A) argued that the profits from the outsourced process might have been inflated by the associate company also claiming deductions under section 80IC.

The Tribunal disagreed with this interpretation, stating that section 80IA(10) is intended to prevent inflated profits through related party transactions, not to reduce profits where the assessee's profits are potentially siphoned off to an associate concern. The Tribunal found no evidence of profit inflation or an arrangement between the parties that resulted in higher-than-ordinary profits for the assessee.

The Tribunal held that the application of section 80IA(10) by the CIT(A) was incorrect and that the assessee was entitled to the full deduction under section 80IC. The Tribunal deleted the disallowance of ?4,26,970/- and allowed the appeal in favor of the assessee.

Conclusion:

The appeals were allowed, affirming that the assessee was entitled to claim the full deduction under section 80IC on the entire profits from the manufacturing of stainless steel flats, including those from outsourced processes. The Tribunal found no basis for applying section 80IA(10) to reduce the deduction and emphasized the need for a literal interpretation of section 80IC without additional qualifications.

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